The Consumer Financial Protection Bureau (CFPB) announced a new rule on Tuesday that prohibits lenders from considering unpaid medical bills when evaluating borrowers for mortgages, auto loans, or business loans. This significant change is expected to positively impact millions of Americans.
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The CFPB’s research indicates that outstanding medical debt is a poor predictor of a borrower’s ability to repay loans. Despite this, medical debt has often been used to deny loan applications, unfairly impacting consumers. This new rule builds upon the decision made last year by the three major credit reporting agencies—Experian, Equifax, and TransUnion—to remove medical collections under $500 from credit reports. The CFPB’s rule expands on this by banning all outstanding medical bills from credit reports and preventing lenders from using this information in their decision-making process.
Sweeping Changes to Credit Reporting
The rule is slated to take effect 60 days after its publication in the Federal Register. This change aims to address the pervasive issue of medical debt impacting creditworthiness.
Impact on Consumers and the Economy
The CFPB estimates that this new rule will remove approximately $49 million in medical debt from the credit reports of 15 million Americans. According to the agency’s data, one in five Americans has at least one medical debt collection account on their credit report, with over half of all collection entries related to medical debt. This burden disproportionately affects people of color, with 28% of Black Americans and 22% of Latino Americans carrying medical debt compared to 17% of white Americans. While the previous voluntary removal of medical debt under $500 provided some relief, many consumers have significantly higher amounts impacting their credit reports.
The CFPB projects that this action will significantly improve access to loans, potentially leading to the approval of around 22,000 additional mortgages annually. Furthermore, Americans with outstanding medical bills could see their credit scores increase by an average of 20 points. Beyond improving access to credit, the rule also enhances privacy protections and aims to prevent debt collectors from leveraging the credit reporting system to coerce payment for disputed or erroneous bills. The CFPB has documented instances where consumers receive inaccurate bills or are pursued for debts covered by insurance or financial assistance.
Additionally, the rule prohibits lenders from using information about necessary medical devices, such as prosthetic limbs, as collateral for loans, safeguarding individuals from the potential repossession of essential medical equipment.
Positive Response from Advocacy Groups
Nonprofit organizations working in the healthcare sector have applauded the CFPB’s decision. Carrie Joy Grimes, founder of the personal finance organization WorkMoney, stated that the rule allows Americans to “focus less on the strain of medical debt and more on getting back on their feet.” Patricia Kelmar, health care campaigns director for the U.S. Public Interest Research Group, emphasized that the rule will benefit “many financially responsible families who have accumulated medical debt from unpredictable health issues, high out-of-pocket costs, insurance claim denials and billing errors.”
Navigating Unexpected Medical Bills
High medical bills are a frequent occurrence in the US, even for insured individuals. Several avenues for relief are available to those facing unexpected medical expenses.
Consumers are encouraged to explore charity care options. Nonprofit hospitals are legally obligated to reduce or eliminate bills based on household income. Information on eligibility can often be found by searching online for the hospital’s financial assistance policy or using resources like Dollar For’s online tool.
The No Surprises Act provides another avenue for appeal. This federal law mandates that insurance companies provide reasonable coverage for out-of-network services related to emergency and certain non-emergency situations. Overcharges for in-network services may also be illegal under this act.
Requesting an itemized bill is crucial. Medical billing is complex and prone to errors. Scrutinizing billing codes against the care received can reveal discrepancies that can be contested. Comparing the bill with insurance companies’ estimates of fair charges can also identify potential overcharges. Consumers can leverage this information to negotiate lower costs or even pursue legal action in small claims court. Finally, comparing the insurance company’s “explanation of benefits” with the hospital bill is essential to ensure accuracy and identify any discrepancies that warrant further action. Even after these steps, appealing health claims with the insurance company or contacting the state insurance commissioner remains an option for those who believe bills should be covered more comprehensively.
The CFPB’s new rule signifies a major step towards a fairer credit system that doesn’t penalize individuals for unforeseen medical expenses.
